The Economic Consequences of Pension Underfunding: Evidence from the Retirement Systems of Alabama

Abstract

There is a strong consensus among economists and public pension experts that many public pensions are substantially underfunded and that absent fundamental reform many state and local governments will have to resort to some mixture of tax increases, budget cuts, and/or bailouts. While many nation-wide empirical studies have evaluated the growth in unfunded pension liabilities, few academic case studies have been done for individual public pension systems to analyze specifically how these unfunded liabilities have accumulated and to formulate concrete avenues for reform. Therefore, this paper provides a case study of the Retirement Systems of Alabama. We find that Alabama is similarly situated relative to a number of other public pension systems in the U.S. when it comes to issues with accounting standards, transparency and oversight, and the use of economically targeted investments. Based on this work, we offer recommendations for reforming public pensions.